IRA Beneficiary Documents

While it is not uncommon to see careful attention given to "traditional" estate planning documents (e.g., wills and trusts), IRA plan documents do not receive the same consideration. There does not seem to be general respect for beneficiary provisions that are independent of a will. And yet, deferred compensation assets in many estates now exceed the value of the assets covered by traditional estate planning documents.

Beneficiary matters seem to be left to the investment broker entity by default. Such a situation may cause problems. At a taxpayer's death, a brokerage house may have gone through several changes (e.g., in entity format, personnel and ownership) from the time he set up an IRA. As a result, a beneficiary document may be difficult to locate or authenticate. Lack of uniformity in the language of a beneficiary document may add to the uncertainty, as there is no specified official form for beneficiary designation and terminology varies.

In addition, what may have been appropriate in beneficiary designation at inception is probably not applicable today. For example, following Letter Ruling 200036047, an IRA may now be divided into a number of separate units without having to form a separate trust for each beneficiary. This change makes it more efficient to distribute an IRA to multiple beneficiaries (e.g., children or grandchildren). The goal is to spread contributions over the life expectancy of each. (Under Sec. 401(a)(9), a taxpayer must, of course, initiate such a choice before required distributions are made.)

Such an arrangement has profound economic and tax benefits. It avoids "bunching" the taxability of a substantial fund at an owner's death, taxed at the highest bracket. It allows the balance at death to be taxed later over each beneficiary's life. The investment (balance of the fund) continues to work, tax-deferred, after the owner's death and the heirs are not "spoiled" with a massive precipitous payout.

Brokers are also not likely to be familiar with Letter Ruling 9704029, which allows qualified terminable interest property (QTIP) trust treatment. An IRA owner can, for example, name a trust beneficiary in place of a spouse. Under the popular QTIP election found in many traditional estate planning documents, an owner and his spouse can continue to withdraw from an IRA fund over their joint life expectancies. With the deferred compensation funds growing exponentially, a practitioner should find this neglected tool well-received by clients. The point is that many advisers are not aware that an IRA can make use of the QTIP provisions.

The pending retirement-savings legislation includes provisions that focus on some beneficiary designation issues, and attempts to address oversights and past mistakes. In the meantime, practitioners should suggest that clients with qualified plans locate beneficiary document(s), if possible, to review the clients' current intentions and any possible alternatives.

From E. Kenneth Whitney, CPP, Anderson-Whitney PC, Greeley, CO